Dai Daohua, Senior Economist
In the first quarter of this year, Hong Kong's gross domestic product declined by 7.8% from a year ago, the second worst outcome on record since 3Q98's -8.1% plunge. Seasonally adjusted GDP contracted by 4.3% or annualized -18.0% from the previous quarter, which was worse than any quarters during the Asian Financial Crisis. The Government revised downward substantially the full year growth estimate from the original -2.0% to -3.0% to -5.5% to -6.5%.
Excessive decline and downward revision
The rapid deterioration in GDP from -2.6% to -7.8% seems excessive in terms of its speed and the magnitude. However, due to the unusually high comparison base of the same period last year (Hong Kong's real GDP growth was 7.3%, 4.1%, 1.5% and -2.6% for the four quarters of 2008, 2.4% for the whole year), there are technical explanations behind such an outsized decline.
From the expenditures point of view, the Hong Kong economy lost almost all growth momentums in the first quarter. Decline in private consumption expenditure accelerated from -4.1% in the previous quarter to -5.5%. Because it accounts for some sixty percent of the local economy, it set the tone for a gloomy quarter. Although decline in gross domestic capital formation narrowed from -17.8% to -12.6%, it was still in double digits. Combined with the decline in inventory, the private sector seemed pessimistic about the near term prospects. Goods and services trade fared even worse, with goods imports and exports recorded significant declines of -21.4% and -22.7% from -6.4% and -4.9% previously due to collapse of external demands. As a result, services exports were down -8.8%. The only sector recording positive growth was government expenditure, which was up 1.5%. But it could not support growth alone due to its limited proportion of about ten percent in the whole economy.
The more worrisome decline was recorded in the seasonally adjusted contraction of 4.3% from the previous quarter (annualized at about -18.0%). None of the expenditure components recorded growth if measured in this way. It is believed that the HKSAR Government substantially revised downward the full year growth estimate on this figure.
Due to the low base established in the first quarter, we also revise downward the full year GDP estimate from -2.0% to -4.0%. The four quarter breakdown is that decline in the second and third quarter in GDP could amount to -5.0% and -4.0% respectively. It is only in the last quarter of this year when external demands stabilize, growth could resume at 1.0% from last year's -2.6%. As for the unemployment rate, the pace of deterioration has eased in April at 5.3%. Therefore, the forecast of an unemployment rate at 6.0% by yearend is maintained. Moreover, Hong Kong does not seem to face the imminent threat of lingering deflation due to the global resurging excess liquidity boosting the local asset prices. Even though consumer price may turn negative in certain months, it is most likely the government's waivers and concessions at work. For the year, CCPI is expected to rise by a modest 1.0%.
The context of decline and the implications
The 1Q09's -7.8% decline in GDP is not only the second worst on record since the Asian Financial Crisis, it is also the second worst since the 1970s, demonstrating the severity of the current global economic and financial crisis. Since no crisis is exactly the same, the context of the decline and the implications are different even though the magnitude of decline is similar.
First of all, the causes of the crisis are different, in which the external shocks are to blame this time while the interaction of external and internal shocks were at work to trigger the crisis ten years ago. After conquering the neighboring nations, speculators concentrated their attacks on Hong Kong dollar's Peg during Asian Financial Crisis. The local stock and property markets went into freefall. The shocks came from the region and within. Yet for the developed world, the US economy was at the peak of its growth cycle at the time, with GDP growing by 4.2% in 1998. Europe's situation was similar, with the Eurozone's GDP at 2.8% during the same period. Thus, although the bursting of Hong Kong's stock and property bubbles destroyed domestic consumption and investment, the external demands were held up during the precious crisis.
This time, the complete opposite took place. The local stock and property market do not have severe bubbles to begin with. But the external demands evaporate due to the US subprime crisis engulfing the developed world. Hong Kong's goods and services trade deteriorate at an alarming speed. The ensuing financial tsunami also deals our leading financial industry with heavy blows. Eventually, the external shocks spill over to the domestic sectors. But the latter avoid the comprehensive collapse as in the Asian Financial Crisis. Statistically, Hong Kong's goods exports were down -22.0% in 1Q09, twice the decline of -10.2% in 3Q98. Meanwhile, the -5.5% decline in retail sales was much smaller than the -19.6% then.
As for the unemployment rate, even though it was 5.2% in 1Q09, the same as in 3Q98, the uptrend started from 3.3% twelve months ago, compared to from 2.1% in the previous crisis. In other words, the deterioration of the labor market was severer in the previous crisis due to the collapse of internal demands. As for consumer price, even though CCPI was up 2.5% in 3Q98, higher than the 1.2% in 1Q09, the bursting of the property bubble dictated that Hong Kong entered a deflationary period that lasted sixty months starting from November 1998. Nowadays, Hong Kong does not seem to face a long spell of deflation due to ample liquidity and the modest correction in the property market. Low inflation should prevail in the foreseeable future.
